The Treasury auction-rigging scandal at Salomon Brothers, until recently one of the most respected and powerful firms on Wall Street, offers a severe lesson in how to behave.
The outcome is unclear, but it is critical that the Treasury market remain fair, open, and competitive, for all other sectors of the credit markets key off Treasuries. Treasury bond yields ultimately control all bond yields, including municipals.
Last week, Salomon's top executives, who had been ousted earlier, lost pay and help with their legal fees.
Moody's Investors Service and Standard & Poor's Corp. downgraded Salomon's bonds.
California, Colorado, Connecticut, Massachusetts, Texas, and Wisconsin suspended dealings with Salomon.
Britain "regretfully" dropped Salomon as manager of a public offering of British Telecom stock.
Salomon common stock, which traded at $36 a share pre-scandal, dropped to 24.
Warren Buffett, the Nebraska billionaire investor who took over as Salomon's chief executive, apologized to Congress.
For a primary dealer and one of the country's most admired securities firms to be rocked so hard is amazing. But it reveals once again that respectability is a thin veneer, that power makes executives contemptuous of oversight, that lax regulation inevitably spawns a quick response from the avaricious.
Washington and New York are now examining the Treasury securities market in the wake of the auction rigging, and both seem to want to sweep the episode aside. The Treasury and the Federal Reserve have asked Congress for 90 days to study the market's operation before any legislation is drafted, and there have been plenty of assurances that the Treasury market is in good hands.
David Mullins, vice chairman of the Fed, pointed to the market's "smooth functioning" in recent months and asserted that "there appears to have been no economically meaningful loss of confidence." E. Gerald Corrigan, president of the Federal Reserve Bank of New York (which oversees Treasury auctions), said he was impressed by the "sweeping management changes" at Salomon. Jerome Powell, a Treasury assistant secretary, said he found no evidence that other dealers engaged in practices similar to Salomon's.
We find these assurances unconvincing. Rep. Edward Markey, DMass., chairman of a subcommittee on finance, characterized the response of the regulators to the Salomon scandal as "totally unacceptable" and said he planned to introduce legislation spelling out more intense oversight of government securities firms.
In this discussion, we find Salomon's behavior does prove that more regulationj is needed. It's a matter of making certain that financial power does not concentrate in too few hands.